Boyd Erman of the Globe & Mail reports in a piece titled Bank of America shocks Maple market:
Bank of America (BAC-N12.680.342.76%) has broken an unwritten rule and shocked the Canadian bond market by deciding not to redeem a $500-million bond issue.
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But the unwritten, wink-and-nod agreement with the investors who bought them was that the bonds would be called at the end of five years so that investors would never have to face the lower rates.Bank of America has decided not to call the bonds and will take advantage of the lower rates. For investors in the bonds, it means lower prices and lower interest income, and a tough decision about what to do next.
My suggestion is that they make a note to read the terms of the issue next time, but what do I know?
The bonds were originally sold with a coupon of 4.81 per cent. Now, under the floating structure, they will pay interest rate at a short-term benchmark plus a fraction of a percentage point. At the moment, that works out to about 1.8 per cent.
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The bonds are now being quoted at about 96 to 97 cents on the dollar by some desks after being marked at par in the days before this on expectations that they would be called at 100 cents on the dollar, market sources said.
The comments on the Globe site are a hoot.
There’s not much information available on this issue, but it’s mentioned briefly in the RBC-CM Maple Guide of 2H08 – with all the pseudo-analysis based on a certainty of call, of course, as is usual with subordinated debt.
I last reviewed this topic in the post Bank Sub-Debt Redemptions.